Pharmaniaga Bhd
(May 19, RM7.10) 
Downgrade to “hold” with a target price (TP) of RM6.58: First quarter financial year 2015 (1QFY15) turnover of RM471.9 million translated into a core net profit of RM32.2 million, making up 29% and 31% of ours and consensus full-year estimates, respectively.

We consider this as within expectations, as 1Q has traditionally been a strong quarter for its financial year.

Historically, 1Q usually represented 28% to 46% of full-year earnings for the past four years. Deviations are in line. 

Declared first single-tier dividend of 7 sen per share (compared with 1QFY14’s 4 sen) accounted for 24% of our dividend per share estimates. The ex-date is on June 1, and payment on June 25.

1Q15 sales increased marginally by 0.7% year-on-year (y-o-y) but declined 24.7% quarter-on-quarter to RM471.9 million due to lower demand in the concession segment. 

Also, note that 4Q14 results went against the traditional trend of being the seasonally weakest quarter.

1Q15 sales ratio of concession to non-concession to Indonesia business was 55%:20%:25% compared with the 1Q14 ratio of 59%:20%:21%.

Indonesia business contributed higher to the revenue, while Pharmaniaga continues to cut down dependency on its concession business.

The logistics and distribution segments posted lower profit before tax (PBT) of RM10.8 million (a decrease of 27% y-o-y) on lower orders from the government in 1QFY15.

The manufacturing division, on the other hand, achieved a higher PBT of 26% as a result of better profit margins, which we believe to be contributed by the price hike in the second half of 2014 (2H14). 

It should enjoy the full impact of the price increase in FY15.

We anticipate that the group would benefit from the Indonesian market, and expect it to contribute positively towards the group’s long-term earnings.

However, post-FY15, earnings could be dragged down by the higher amortisation costs from the pharmacy information systems implementation (PhIS). 

Catalysts are gaining market share in non-concession and private sectors, synergistic benefits from acquisition, favourable foreign exchange (forex) and continuous effective operational strategy.

Risks are political, regulatory, competitive or forex ones; failure or delay in drug delivery under CA; and whether there is compliance to production standards, or contamination and drug patent disputes.

Forecasts remain unchanged. Positives are synergy from acquisition, quarterly dividends and secured business outlook thanks to CA, as well as defensive and growing business.

Negatives are forex, high level of stock and gearing. Given that the share price has increased 57% year to date to RM6.91, we downgrade the stock to “hold” with an unchanged TP of RM6.58 based on an unchanged FY16 price-to-earnings ratio multiple of 15 times, with 15% discount to US peers. — Hong Leong Investment Bank, May 19.

This article first appeared in The Edge Financial Daily, on May 20, 2015.